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 The average individual ESOP account balance of corporate members, according to the 

Association’s survey, is $192,223. Among Association corporate members, 78% also 

sponsor a 401(k) plan. 

 When creating their ESOPs, 96.7% of the corporations did not reduce wages or other 

benefits, and 70.35% did not utilize another plan’s assets, to fund their ESOPs. 

 Approximately 900 professionals are secondary members of the Association. 

Approximately 100 members provide valuation services to privately-held ESOP companies, 

which are required by law to obtain an independent valuation of ESOP shares annually. Other 

professional members include lawyers, plan administrators, lenders, trustees, and ownership 

culture management consultants. 

Privately-held small businesses that sponsor ESOPs, businesses considering ESOPs, and 

professionals that provide services to ESOP trustees and companies would be directly impacted 

by the Proposed Regulation “Definition of the Term Fiduciary,” (Federal Register, Volume 75, 

Number 204, Pages 65263-6578, October 22, 2010, Proposed Regulation). 

On behalf of our membership, the Association appreciates the opportunity to express its 

views on the Proposed Regulation. 

I. Association’s Education Mission Focuses on ERISA Compliance 

 The mission of the Association since 1993 is “To educate and advocate about employee 

ownership with emphasis on ESOPs.” The leaders of the Association purposely listed 

“education” first, as a basic tenet of the Association is that well-managed, high performing ESOP 

companies, visible in local communities, are the best and most effective way to execute the 

advocacy mission. 

 Over 50% of the Association’s annual resources are spent on education. In 2010, 8,089 

individuals attended Association educational programs. Education of ESOP company 

fiduciaries, focusing on their obligations to retain competent valuation firms, understand the 

valuation report, and decide whether to accept a valuation report, is a major topic at Association 

national and chapter meetings. Other conference and meeting attendees had exposure to the 

topics related to ERISA compliant valuation of ESOP shares of private companies. 

Nearly every chapter meeting had either breakout sessions or a general session, with a 

DOL official from a regional or district office going over the DOL audit process, including the 

documentation necessary for the auditor to review decisions about the annual valuation report 

made by the plan trustee. For over 20 years, representatives of the IRS and Department of 

Treasury have participated in the Association’s annual conference, and have answered questions 

submitted by practitioners, in a continued effort to educate and inform Association professional 

members. 

 
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 The members of the Association’s Advisory Committee on Valuation (VAC) are key to 

the quality of fiduciary education on valuation matters. They lead discussions involving 

thousands of attendees and write articles for the Association’s monthly newsletter on valuation 

“hot” issues, produce white papers on best practices, prepare booklets and handbooks on valuing 

ESOP shares, and contribute the chapter in the “ESOP Fiduciary Handbook” on reviewing, and 

rejecting or accepting a valuation report. VAC members educate companies, fiduciaries, and 

other professional members, and ensure that the latest information on valuation best practices is 

available. 

Other Association committees also touch valuation topics. The Legal and Regulatory 

Committee, for example, often works with the VAC to update members on new case 

developments and other topics that may affect valuation, and the Financing and Administration 

Committees also contribute to discussions on valuation. 

VAC members are volunteers. They agree with the basic premise that the best way to 

maintain current laws permitting and encouraging employee ownership via the ESOP model – 

the advocacy mission – is to have excellent ESOP practices, and ensure that ESOP trustees and 

fiduciaries, internal and institutional, understand and comply with ERISA. Compliance with 

ERISA law is the best path to a high performing company that will provide adequate retirement 

security to its ESOP participants. 

II. Department of Labor Concerns 

In proposing the expansion of the definition of investment advice for purposes of the 

definition of a fiduciary under Section 3(21) of the Employee Retirement Income Security Act of 

1974, as amended ("ERISA"), the DOL has identified three areas of concern: (i) a significant 

shift in the marketplace for employee benefit plan services since the DOL last provided fiduciary 

rules in 1975, (ii) avoidance of conflicts of interest that may exist with service providers, and (iii) 

incorrect valuations of employer securities. The proposal states that these concerns were 

identified in the DOL's Consultant/Advisor Project (CAP), recent testimony before the 

Government Accountability Office (GAO) and in the Employee Benefits Security 

Administration (EBSA) national enforcement project relating to ESOPs. 

 The Association believes that the marketplace for ESOP transaction services generally 

has not changed since 1975, with the overwhelming majority of ESOPs created when a 

shareholder(s) of a privately-held company sells her/his shares to an ESOP. 

With regard to conflicts of interest, it is not apparent to the Association that ESOP 

appraisers regularly have conflicts of interest with respect to the plans for which they work. This 

would, of course, be contrary to Section 401(a)(28) of the Internal Revenue Code which requires 

that appraisers be independent. Moreover, the DOL proposed regulation setting forth the 

definition of adequate consideration (Prop. Reg. Sec. 2510.3-18, referred to herein as the 1988 

Proposed Regulation) also requires the independence of an appraiser as a condition to a 

prohibited transaction exemption. 
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With regard to incorrect valuations of private company ESOP stock, the Association 

acknowledges and shares the DOL’s concern but questions whether the problem is as widespread 

as the DOL implies. The Association has not heard significant numbers of complaints from its 

corporate or fiduciary members about incorrect ESOP valuations. The Association provides 

seminars and educational sessions on the valuation of employer securities at conferences, and 

publishes written material on valuation. 

If the DOL is correct in its assessment, the Association also questions the effectiveness 

and appropriateness of converting ESOP appraisers into ERISA fiduciaries as means of reducing 

the number of incorrect ESOP appraisals. The Association believes there are other means of 

addressing the DOL’s concern short of a wholesale change to over thirty five (35) years of 

statutory guidance, and respectfully requests the opportunity to engage in a dialogue with the 

DOL to assist in fashioning an appropriate and effective means for addressing such concerns. 

To that end, it would be useful for purposes of this discussion if the DOL could provide 

statistics on the frequency of incorrect ESOP valuations and the nature of the errors the DOL 

auditors encounter. 

III. Legal Precedent and ERISA Legal Regime Overlooked by Proposed Regulation 

 A. The Proposed Regulation Exceeds the DOL’s Authority

 Section 3(21)(ii) of ERISA creates fiduciary status for a person who “. . . renders 

investment advice for a fee . . .” The preparation of an appraisal of an asset, whether employer 

securities, real estate or otherwise, was not intended by Congress to create an ERISA fiduciary 

status. Neither an appraisal, nor a fairness opinion rendered in a transaction, makes a 

recommendation to the trustee of a course of action. In either instance, it remains the trustee’s 

ERISA fiduciary responsibility to make an investment decision, with the appraisal or fairness 

report a tool in that process. 

 Federal courts have correctly instructed ESOP trustees that an independent appraisal does 

not automatically establish a transaction price for employer securities. Rather, the trustee is 

responsible to prudently review and then utilize the report in making an investment decision. In 

order to add asset valuations and fairness opinions to the list of items that constitute “investment 

advice” we believe the DOL would need Congress to add a new subsection to Section 3(21) of 

ERISA to this effect. 

 

 B. The Proposed Regulation Interferes with the Trustee’s Traditional Oversight 

Role over the Appraiser 

We assume the DOL believes that making the ESOP appraiser a fiduciary will create a 

system of oversight over the ESOP appraiser which has somehow been absent. This belief would 

be an incorrect understanding of the role that has developed between the ESOP appraiser and the 

ESOP trustee under current law and regulatory guidance. It is important to understand that an 

oversight system already exists. As the plan fiduciary, the ESOP trustee is responsible for 

determining the fair market value of the employer securities to be acquired by or held under the 

ESOP. The ESOP trustee retains and works closely with the ESOP appraiser as its financial 
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advisor, to assist the ESOP trustee with undertaking the financial review and ultimate valuation 

determination. If the ESOP appraiser’s skill, or analysis, is lacking under applicable professional 

standards, then it is the ESOP trustee’s responsibility to investigate the relevant issues and make 

a determination regarding whether the ESOP appraiser can continue to provide the ESOP trustee 

with the necessary financial assistance on behalf of the plan. This relationship allows the ESOP 

appraiser to focus on the specific task of providing advice to the ESOP trustee who is the party 

responsible for decisions regarding transactions and the related fair market value of the employer 

securities. (See Chapter 6.C, “Review of Valuation Report”, ESOP Fiduciary Handbook, The 

ESOP Association, 2010, pages 36-42.) Further, the current structure already provides the DOL 

with adequate redress for an incorrect valuation, but such redress rests with the ESOP trustee the 

plan fiduciary charged with making the fair market value determination and ensuring a correct 

valuation. 

IV. Negative Impacts on Pension Benefits 

 The DOL’s stated goal in expanding the definition of investment advice is to create a 

bright line identifying who is a fiduciary. The DOL states that its limited resources are stretched 

by the task of assessing who is a plan fiduciary, impacting its ability to assess whether a breach 

occurred. This reasoning is not justified, and is short sighted, because this sweeping shift in the 

fiduciary rules will have significant negative consequences for ESOP companies and the ESOP 

participants that the DOL seeks to protect. Further, because the ESOP trustee is always a plan 

fiduciary and acts in a fiduciary capacity in determining fair market value and adequate 

consideration, in each and every instance where the perceived ill is the incorrect valuation, the 

DOL’s argument that it is unable to establish the ESOP trustee as the fiduciary is unfounded. 

 In the Regulatory Impact analysis section of the proposal, the DOL submits a list of three 

benefits the proposed regulation will provide, but states that “. . . the Department is unable to 

quantify these benefits, [but] the Department tentatively concludes they would justify their cost." 

The DOL then estimates the service provider community would incur a cost of $10.1 million to 

assess its fiduciary status under ERISA. Setting aside any disagreement over this initial cost, the 

Association’s view is that the larger costs of the proposal will be felt by plan participants 

through: (i) a shrinking of the marketplace for competent appraisers (ii) higher costs to ESOP 

sponsors to retain competent appraisers and (iii) greater costs of protecting against litigation (i.e. 

additional involvement of counsel and greater documentation). The overarching cost however, is 

not so easily quantified and will be seen when business owners, instead of pursuing a transaction 

with burdensome regulation as well as cost, business owners choose to pursue other means of 

ownership transition, such as sales to third parties, which may result in less wealth in qualified 

plans. 

 Many of the best appraisers currently work for large or mid-sized multi-disciplinary 

financial service organizations. Such firms have resources, depth of expertise, breadth of 

experience, and work on a variety of types of non ESOP assignments and bring this experience 

to their ESOP appraisals. Generally, none of the professionals in these organizations are ERISA 

fiduciaries, or fiduciaries under any set of Federal or state laws. The Association believes these 

firms will not have a financial incentive to accept fiduciary status related to ERISA appraisals 

and may cease providing services to ESOP sponsors and trustees. ESOP companies and trustees 
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will lose the expertise that these firms bring to their clients when performing an ESOP valuation 

engagement. The ESOP community, including peer firms, will also lose the benefit of these 

firms’ knowledge. 

For those firms that choose to continue to perform ESOP appraisals, significant costs will 

be incurred beyond the initial compliance assessment cost detailed by the DOL. First, firms will 

need to obtain fiduciary liability insurance, a more complex and expensive product than the 

current errors and omissions insurance most hold; second, valuation firms will need ERISA legal 

counsel for each engagement to advise on their fiduciary duties and responsibilities in a 

particular transaction or valuation; third, valuation firms will likely change their interactions and 

business relationships with ESOP trustees in order to manage their own ERISA fiduciary risks; 

fourth, ongoing compliance costs may increase; and fifth, instances of litigation will increase. 

For ESOP sponsors, this means: (i) higher costs of valuation services, (ii) fewer qualified 

appraisers, and the need to replace appraisers who leave the market; (iii) confusion as to who is 

responsible for certain fiduciary functions; and (iv) loss in the industry of the benefits of working 

with multi-disciplinary organizations. 

 The DOL has identified "incorrect valuations" as the principal concern in the Proposed 

Regulation. The Association disagrees that the Proposed Regulation will, in and of itself, result 

in more accurate appraisals when fewer qualified appraisers will perform ESOP valuations, and 

the remaining firms may be less well capitalized entities that may not have the resources to 

defend their opinions. Further the Association fails to see how making more parties fiduciaries 

solves the problem when a clearly identified plan fiduciary, the ESOP trustee, is already 

responsible for the ESOP valuation and its accuracy. 

V. Alternative Approaches 

 A. Provide Guidance 

We are not aware, and do not acknowledge, that there is a widespread problem with 

ESOP valuations among our membership. 

However, to the extent the DOL perceives a problem, the Association believes it is more 

effective to focus regulatory efforts on prevention rather than punishment. Valuation standards 

already exist in a variety of professional organizations such as the American Society of 

Appraisers (ASA), American Institute of Certified Public Accountants (AICPA), as well as 

guidance used by the IRS, and could be easily adopted by the DOL. Hard-to-value securities held 

on companies’ and ERISA plans balance sheets have been a significant focus of accounting 

standards. It would be very reasonable for the DOL to adopt general operating principles of 

valuation that are already generally accepted and well understood in the valuation profession. 
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 DOL’s 1988 Proposed Regulation defining “adequate consideration” provides guidance 

on valuing employer securities. Though not issued as final, and therefore not binding. many 

appraisers choose to rely on the 1988 Proposed Regulation as if it were final. With better 

guidance, the ESOP trustee’s task of reviewing and approving valuations before accepting them 

would be improved because it would know the standard against which to measure the appraisal 

 We respectfully suggest the DOL finalize the 1988 Proposed Regulation, and amend it 

to include a more detailed description of the trustee’s role in assessing a valuation or the 

valuation report. 

 B. Appraiser Credentials

The Association’s Valuation Advisory Committee, whose members consist of the most 

prominent ESOP valuation advisors in the United States, was formed to bring professionals together to 

discuss ESOP valuation issues. The Association also provides forums for the interaction among 

various ESOP professionals to address ESOP issues, including a recently formed Interdisciplinary 

Committee. ESOP valuations have, for the most part, been self regulated by those professionals who 

have endeavored to build solid ESOP valuation practices based on generally accepted valuation 

methods and procedures. These experienced ESOP professionals have worked together to develop 

consensus on many ESOP valuation issues. 

Most ESOP appraisers are well educated, informed, and credentialed and continue their 

education by reading industry materials and scholarly journals, and attend conferences and seminars to 

keep abreast of financial theory, regulatory changes, and other factors affecting business appraisals. 

Many have advanced degrees in finance and maintain appraisal-related credentials such as the ASA, 

Chartered Financial Analyst, or AICPA designations. One of the duties of an ESOP trustee is to 

choose a qualified appraiser, and various credentials can help an ESOP trustee discern who is 

qualified. 

In light of the fact that most ESOP appraisers are already credentialed, the Association believes 

that the DOL’s resources would be best served by engaging in a dialogue with ESOP professionals, 

including the Association, to identify the DOL’s specific concerns about appraiser competence so the 

ESOP community can self-regulate. For example, the DOL may find that those ESOP appraisals that it 

believes are “incorrect” are performed by appraisers without appropriate valuation credentials, or who 

are not part of the various professional organizations that provide training and education related to 

ESOP valuation. Further discussion and guidance may help the Association’s members choose the 

most qualified appraisers. 

VI. Conclusion and Final Words 

Again, The ESOP Association appreciates your review of these comments.

The valuation of privately held stock is an imprecise science. This is the very nature of 

advanced finance theory. There is often no single “correct” answer to the question of valuation. 

Imposing fiduciary standards on ESOP appraisers would expose ESOP appraisers to increased 
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liability, without addressing the DOL’s perceived need for improved financial advice regarding 

valuation. 

 

 On behalf of our 1,400 corporate members, we believe the proposal to mandate 

appraisers of privately-held ESOP company stock be ERISA fiduciaries will increase the cost of 

the valuation substantially. We also believe there are more efficient, less economically 

burdensome ways to ensure valuations are done properly without reducing ESOP companies’ 

profits (and the accounts of ESOP participants). The Proposed Regulation will confuse and blur 

responsibilities between the trustee and the valuation firm. The Proposed Regulation will confuse 

interpretation of the law about ESOP trustee decisions and will be very expensive for ESOP 

companies if more private parties sue ESOP companies and ESOP trustees in cases that Federal 

courts currently dismisses. 

Finally, ESOP companies provide locally controlled jobs, many in the manufacturing 

sector, that provide average pay employees with significant retirement savings. In fact, DOL’s 

Office of the American Workplace under former Secretary of Labor Robert Reich labeled ESOP 

companies as examples of high performing companies, and highlighted quotes from The ESOP 

Association’s then leader, the late Charles Edmunson. 

 We respect and support the important and difficult job of DOL investigators in 

uncovering improper valuation work and agree that those responsible should be held 

accountable. We would welcome the opportunity to work with you to discover an approach that 

will help the DOL achieve that goal. 

 

 Sincerely yours, 

 

 J. Michael Keeling, CAE 

 President 

Note: These comments were primarily prepared under the direction of Laurence A. 

Goldberg, Sheppard, Mullin Richter & Hampton, San Francisco. He had input from other 

members of The ESOP Association Advisory Committee on Legislative and Regulatory Issues, 

and member of the Advisory Committee on Valuation. The Executive Committee of The ESOP 

Association, consisting of four people who are senior executives of corporations sponsoring 

ESOPs, reviewed the comments as well.